Guest post by resident accountant, Tahlia Sinnott
A deduction that we are regularly asked about is what can I claim?
Whether you are an employee or a business owner, if you use your car for ‘work’ it is important to know when you can claim a tax deduction for tax purposes and how you go about it.
When is travel work related?
You can claim a deduction for work-related car expenses if you use your own car in the course of performing your job, for example, to:
- carry bulky tools or equipment
- attend conferences or meetings
- deliver items or collect supplies
- travel between two separate places of employment (for example, when you have a second job)
- travel from your normal workplace to an alternative workplace and back to your normal workplace or directly home
- travel from your home to an alternative workplace and then to your normal workplace or directly home (for example, if you travel to a client’s premises)
- perform itinerant work.
The more important piece of information is when you can’t claim a deduction for work related car expenses – this is generally travel between home and work. Travel between home and work is deemed to be private in nature. A reasoning behind this is because some people elect to live 5 minutes’ drive away from their work place while others may live in a coastal town and travel a number of kilometres to work each day. As where you live is a private decision, so is generally the travel between work and home.
How do you calculate what you can claim as a tax deduction?
From 1 July 2015, the Australian Taxation Office have simplified the system and you have two options:
Option 1: Cents per kilometre
With this method you don’t need to keep a log book of the kilometres travelled however you need to be able to show how you worked your business kilometres out. The most common way of tracking your work related travel is reviewing your work diary or calendar and assessing the work related trips.
With this method, you calculate the number of kilometres travelled for work related trips in the financial year (from the work related examples above) and times the number of kilometres by 66 cents. Noting that the maximum number of business kilometres you may claim under this method is 5,000 kilometres. Therefore the maximum deduction you may claim is $3,300.
Examples of taxpayers who generally elect this method are:
- travel less than 5,000 work related kilometres per year
- don’t like to have to keep comprehensive records of motor vehicle expenses
- don’t want to do a log book method
- have an older car for depreciating purposes (see Log book method for reasoning behind this)
Option 2: Log book method
The log book method is a more comprehensive method and taxpayers generally elect to use this method if they travel a lot for work and have large work related motor vehicle expenses.
With the log book method, you must firstly maintain a log book for a minimum continuous period of 12 weeks. This involves recording your odometer readings for the 12 week period. After the 12 week period you then calculate how many kilometres you have travelled for work related purposes as a percentage of the total kilometres travelled for the period. The percentage calculated becomes your business use percentage.
With the log book method, you must then keep the documentation on all your motor vehicles expenses for the financial year. This includes fuel, repairs and maintenance, insurance and registration. You can also claim a deduction for the decline in value (depreciation) of your motor vehicle as well as the interest component should you finance the vehicle or lease payments if you lease the vehicle. Please note the decline is value deduction is limited to the luxury car limit.
Once the total expenses for the year are calculated (including decline in value) you are able to claim a deduction for the business use percentage of the total expenses.
For example, if you came out with a log book percentage of 85% when you did your 12 week log book and you calculated your total motor vehicle expense for the year to be $9,000 – you would be able to claim a deduction for $7,650 ($9,000 x 85%).
The key points with this method are:
- must do a log book (log book % last 5 years or until you buy a new car)
- must keep all tax invoices for motor vehicle expenses incurred. You can claim fuel costs on actual receipts or you can estimate the expenses based on odometer records maintained for the motor vehicle for the year.
- When you sell your car there are taxable consequences should you sell the vehicle for more than what the written down value of the car is for tax purposes. It is best to speak to your accountant about this.
Taxpayers are able to choose which method they would like to use. Some clients may meet all the requirements under the log book method however when it comes to the actual deduction – they are better off claiming a deduction under the cents per kilometre method.
As always, it is best to discuss this with your accountant and work with them to determine the best method for your circumstances.
If you would like to have a chat about your particular circumstance, please feel free to give me a call.
Tax & Business Advisor
(03) 5228 2222